As Prepared for Delivery on December 16, 2021
Thank you for today’s presentation. Earlier this year, because of the pandemic among other factors, I called on setting the normal operating level at 1.30, at least temporarily. When I called on lowering the normal operating level, I also did so because it became clear to me that the current normal operating level was too high because the taxi medallion crisis is behind us and any risks from the closure of the temporary corporate stabilization fund have generally ceased.
I will begin by asking a question: From 1984 to 2017, what was the normal operating level set by the NCUA Board?
It was 1.30 percent. And it stayed at 1.30 during times of conflict and times of relative calm, through economic booms and busts, through societal and technological changes. It stayed that way until 2017, when I believe the agency was worried about the failure of the credit unions heavily concentrated in taxi medallion loans, and rightfully so. I will also note that when the normal operating level increase was done in 2017 it was indicated that the normal operating level increase was “...intended to be a temporary”.
As we approach 2022, and now that we have a few years of historical data to review the 2017 policy, it is appropriate to take a look at the facts. This is an issue where I have seriously studied over the last several months, so my views have evolved.
Here is my thinking: If 1.30 is not adequate, I think the burden of proof is on the NCUA to show that this figure is inadequate.
In that regard, I do have some questions:
- Would a Normal Operating Level of 1.30 cover every yearly loss the fund has experienced this century, including the taxi medallion losses?
- Even in the great recession, what were the actual losses in terms of basis points for the Share Insurance Fund?
- I realize this is a hypothetical question, but for every basis point increase in the normal operating level, how much does that have the potential to take away from credit unions–and ultimately their member owners–in the form of a potential dividend based on this current point in time assuming we were required to pay a dividend?
Thank you. Our system is different from the FDIC's, as it should be, frankly. The risk profile is different between credit unions and banks. And we have a cooperative system in a way that normal operating level and Share Insurance Fund are all built by design.
Credit unions are legally committed and bound to update a large majority of the Share Insurance Fund equity contribution. Credit unions today provide the bulk of the capital contributions that are the basis of the fund's soundness. It's the cooperative insurance system prudently run by the NCUA. A premium is always an option under the law, but it can only raise funds to a normal operating level of 1.30. Having a normal operating level above 1.30 negates a lot of the benefit that credit unions may receive by perpetually underwriting the 1 percent capital commitment to the Share Insurance Fund.
The Vice Chairman often talks about incentives. As he puts it, you get what you incentivize. So, moving forward, I would like to see if we can better incentivize the loss reserves with actual losses incurred. And this is relevant because the more we hold in loss reserves, the lower the equity ratio.
The calculation before the board today sets the normal operating level at 1.33. What is the basis for the 1.33 calculation, please explain in detail the way we got here, including any assumptions or calculations used? I think this is very important for the public to understand.
- In this forecast, what is the assumed loss rate?
- What interest rates did we assume?
Thank you. While I believe you can make a case to have the normal operating level set at 1.30, since today’s proposal reduces the normal operating level to 1.33, it is something I can support since it removes things from the normal operating level calculation that are no longer relevant —the risks posed by the closing of the Temporary Corporate Credit union Stabilization Fund, for example.
In closing, will we commit to making a detailed calculation of the assumptions used to calculate a normal operating level public every year, that way credit unions do not feel like this calculation is done without transparency?
I have no further questions.